Did the IV in the SPX Confirm the Rally Yesterday?
Did the IV in the SPX Confirm the Rally Yesterday?
There were more musings out of Europe of a TARP like bank recap for troubled banks along Mediterranean. There seems to be a direct correlation between vacation spots in sunny climates and non-payment of obligations (Spain, Greece, California, etcÖ). The Euro managed a rally yesterday with the SPX up 1.5% or so. All is rosy right? Well not so fast, the VIX was only down 5.77% (VXX, its future based cousin down 1.74%) which is pretty light for such a solid rally. As usually it was a rally without any liquidity so look at the individual options in the July SPX.
Two out of three important strikes are up so how is the VIX even down? While the VIX is an excellent indicator it is not perfect. At Option Pit we teach our Gold Students to look at Skew in 3D, as in 3 pieces, the OTM puts, ATM and OTM calls to get a better idea what is going on behind the Skew Curtain. Today with the move up to less OTM puts and with a slight decrease in call IV in July that pushed the VIX down when it really felt like it was up. The Skew steepened as we rallied which does not show up that great. I donít think the market bought this latest rally too well. It will not be surprising if we open down again coming into the elections this weekend. In short, more of the same for this week.
The Trade
Fading the rallies with OTM put time spreads in the indexes that surround the election have been working great. They will probably work until some form of resolution (this weekend?) starts to present itself or if Germany decides to foot the bill.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.
He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.
He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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